As procurement professionals, we have come to take certain ideas for granted. Savings is still our primary performance metric given the ever-increasing challenges of today’s market environment. However, savings can no longer be the exclusive North Star to our voyage. We need to become more strategic by increasing our ability to create shareholder value and contribute to corporate competitive advantage. Collaboration with suppliers, at least in certain categories, requires that we take a multi-dimensional look at each commercial opportunity and play a long-term, relationship-oriented game.
In a March 10 Supply Management article addressing accusations of bullying against buyers in supermarket retail, we read about the negative consequences of overly aggressive savings-driven tactics by procurement organizations. Two very critical and equally illuminating ideas about responsibility and capability were offered up as quotes in the article.
The first was from David Noble, group CEO at CIPS: “The ultimate responsibility must be with boards and CEOs of companies to interrogate their supply chains and understand what exactly is happening and who is responsible and accountable.”
The second was from groceries code adjudicator (GCA) Christine Tacon: “We might need a new generation of buyers to bring about wholesale change.”
I find these two quotes very interesting. When you consider them in combination, it becomes clear that while procurement is often blamed for poor relationships with suppliers, we are not acting in a vacuum. We get our metrics and other prioritizing objectives from the highest levels of the organization. Replacing procurement for the sake of improving supplier relations addresses the symptoms of the problem rather than identifying the cause.
I worked in grocery retail for years – in fact, that is where I got my start in procurement. The cost-conscious mindset is pervasive. The mantra “watch the pennies” is often repeated in meetings. While retail is often looked at as one sector, the wide range of profit margins affects individual retail businesses differently. Grocery retail, for example, operates on one of the thinnest margins in the sector – sometimes less than a percent.
In a recent conversation with a procurement consultant I was asked, “Would you consider the retail and manufacturing sectors leaders in procurement?” The question took me back to those days of carefully counting pennies. Such narrow margins require aggressive cost management. In many cases, retailers have their procurement teams to thank for their success or even their survival to this point. If, in the future, the company wants their mode of supply operation to change, shifts in perspective must change far beyond procurement.
It is absolutely possible to run a retail business with wider margins than are traditionally seen in most supermarket enterprises. To successfully realize that goal, consumers need to be drawn by an incentive beyond just value for their money. Whole Foods is a perfect example. They have managed to preserve much wider margins than other supermarket chains because they trade on identity and culture rather than just food sales. “Whole Foods’ net profit margin clocks in at 4.1%, better than 85% of its competitors,” wrote The Motley Fool’s Justin Loiseau in June of 2014. “On the other end of the spectrum, the Kroger Co. ends up with just 1.6% of sales.”
Whole Foods’ impressive feat is not possible without a strategy that encompasses every part of the company. While some procurement professionals may take their cost-cutting duties to an extreme, we can’t be solely responsible to sustain such large margins. Marketing, business development, and the executive level team must first lead the way before procurement can shift from penny pinching to value creation.